ES: The Economic Impact of an Aging World

During the week of June 10, 2024, French markets were rocked by a government bond sell-off after a strong showing by the far-right National Rally party in the European Union election. With polls suggesting the party might win a plurality of seats in the upcoming French parliamentary election, investors feared a promised social spending program, including reducing the minimum retirement age from 64 to 60, would further strain the already struggling French economy.

As it turned out, the left-wing New Popular Front coalition — which also promised expensive social spending and a reduction in the pension age — won the most seats on election day. The initial reaction in the government bond market was muted, but analysts predicted further turmoil. By contrast, when France raised the retirement age from 62 to 64 in 2023, aiming to strengthen the economy, workers took to the streets in protest.

Supporting senior programs

The conflict in France over the retirement age reflects a broader social and economic issue across the developed world. Populations are aging. As a result, the share of workers who support economic growth and fund pension and health care programs is shrinking.

The U.S. Social Security program illustrates this challenge. In 1960, there were 5.1 workers contributing for each beneficiary. By 2024, that number had fallen to 2.7. It is projected to decline further to 2.3 by 2040.

Because of this shift, Social Security no longer fully funds itself. The program has relied in part on trust fund reserves that were built up when there were more workers per beneficiary.

The Old-Age and Survivors Insurance Trust Fund supports retirement benefits. Its reserves are projected to be depleted in 2033. At that point, program income would cover only about 79% of scheduled benefits unless Congress increases funding.

Medicare faces similar long-term pressures. The Hospital Insurance Trust Fund helps pay for Medicare Part A inpatient and hospital care. Its reserves are projected to be exhausted in 2036. At that time, payroll taxes and other revenue would cover only about 89% of program costs.

Medicare Part B and Part D operate differently. They are automatically balanced through premiums and transfers from the federal government’s general fund. However, these programs will require a growing share of the federal budget. This will continue unless economic growth exceeds health care spending growth.

Longer lives, fewer children

The shift toward an older population is driven by two key demographic trends. People are living longer, and they are having fewer children.

By 2050, one in six people worldwide will be age 65 or older. The United States has already reached this level. In 2022, more than 17% of the U.S. population was age 65 or older. That share is projected to rise to nearly 23% by 2050.

Many developed nations have even older populations. In 2022, the median age in the United States was 38.9. This was the highest level on record.

Other countries have much higher median ages. In 2021, the median age was 48.4 in Japan. It was 46.8 in Italy, 44.9 in Germany, and 41.6 in France.

The fertility rate measures the average number of children born to each woman. This rate has declined worldwide. Several factors contribute to this trend, including education, access to birth control, employment opportunities, and lifestyle choices.

In developed countries, a fertility rate of about 2.1 is considered the replacement level. At this rate, the population remains stable. The replacement rate is slightly higher in developing countries due to higher mortality.

Most developed nations have been below replacement since the 1970s. As a result, they have relied on immigration to maintain or grow their populations.

In the United States, the fertility rate was 1.62 in 2023. Fertility remains higher in developing countries, but it is also declining.

Based on preliminary data, one academic study suggests a historic shift. The global fertility rate may now be near or below replacement for the first time in human history.

Challenges and solutions

Spending on programs for aging populations is already straining economies worldwide. This pressure is expected to grow as populations continue to age.

The burden goes beyond program costs. A smaller workforce can lead to lower production and reduced tax revenue. Together, these forces may increase government debt. Higher government borrowing and competition for fewer workers could also contribute to higher inflation.

So far, government efforts to encourage higher birth rates have had limited success. There is no clear link between fertility rates and factors such as child-care costs, housing prices, student debt, employment, religious beliefs, or laws related to contraception and abortion.

This suggests that decisions to have fewer children are tied to deeper lifestyle choices. In developed countries, immigration may help expand the workforce. However, recent immigration has often consisted of lower-skilled workers.

Funding gaps in government pension programs, such as Social Security, can be addressed in several ways. Possible solutions include raising retirement ages, increasing payroll taxes, and applying means testing for wealthier beneficiaries. While these options may be politically unpopular, they are unlikely to disrupt the broader economy.

A larger challenge is sustaining global economic growth. This may require higher worker productivity through new technologies. It may also depend on greater participation by older workers.

U.S. worker productivity grew at an annual rate of 2.9% in the first quarter of 2024. This rate is well above the long-term average since the end of World War II. If this trend continues, it could help offset productivity losses as older workers retire.

Americans are already working longer. In 2024, about one in five people aged 65 and older was employed. This is nearly double the share in 1985.

The long-term solution may involve rethinking traditional career paths. More emphasis on lifelong learning and late-life career development may be needed. Research suggests that working longer may help reduce cognitive decline. It could also help ease the broader economic effects of global aging.

Projections are based on current conditions, subject to change, and may not come to pass.

1) Bloomberg, June 16, 2024
2) CNBC, July 8, 2024
3, 17) The New York Times, January 21, 2023
4) 2024 Social Security Trustees Report
5) 2024 Medicare Trustees Report
6, 9–10) United Nations World Population Prospects 2022
7–8) U.S. Census Bureau, 2023
11) National Center for Health Statistics, April 2024
12, 14) The Wall Street Journal, May 13, 2024
13) Bloomberg, May 21, 2024
15) Social Security Administration, September 27, 2023
16) U.S. Bureau of Labor Statistics, 2024

IMPORTANT DISCLOSURES

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